The Effect of Carbon Emissions on Company Profitability

Abstract

Sustainability factors and in particular environmental factors have become increasingly important in recent years for companies, governments and public agencies, but also for many other stakeholders, gaining ground at the expense of financial factors. Non-financial reporting is an area of major interest for companies and researchers, but financial aspects and the quality of financial reporting remain relevant, influencing corporate decisions, including the adoption of short, medium, and long-term sustainability strategies. The two elements, financial and non-financial, mutually influence each other: the adoption of sustainable strategies entails additional costs, leading to lower profits in the short term; while the adoption of sustainability strategies can be beneficial for the profitability of companies in the long term. Thus, this paper aims to study the influence that the dissemination of information on carbon emissions has on the profitability of companies and to confirm or deny the synergy between environmental regulations and the economic development of companies. Moreover, another dimension in which we will approach the research involves analyzing the position in which the carbon disclosures rank in comparison with the ESG score. The study is carried out by using quantitative research methods on a sample of companies in the European Union, and the data used in the research are extracted from the LSEG Data & Analytics (Refinitiv) database and are explained in the paper. The contribution of our study is represented by the simultaneous analysis of the influence that carbon emissions and sustainability performance (ESG score) have on companies' profitability and by bringing together emerging and developed economies in the same study. In order to achieve the research objective, we consider similar research in the literature. We believe that the topic addressed in this paper is topical and may be relevant for future academic research on the case of carbon emissions in relation to corporate profitability.